There are more than 2 million farms in the United States, and about 99% of them are operated by families. These agricultural operations make an oversized impact on our population, with each farm feeding 165 people annually. The thing is, with the global population projected to hit 9.7 billion by 2050, the farmers of the world will need to grow 70% more food than they do today in order to meet the demand.
That’s a daunting task to consider, and it’s only made more challenging when you consider that farm income has been on the decline for years. According to a survey from the Eighth Federal Reserve District (which includes Arkansas, Illinois, Indiana, Kentucky, Mississippi, Missouri, and Tennessee), the first quarter of 2018 marked the 17th consecutive quarter of farm income decline.
As the Eighth Federal Reserve District’s research reveals, the value of quality farmland and cash rents also took a dip earlier this year. What explains these consistent declines? According to one lender cited in the report, it’s due to diversification.
“In the past, producers sought off-farm income to bridge cash flow shortages,” said the lender. “Today, larger producers are seeking to diversify (excavating, construction, trucking, and new livestock confinement) to provide additional income by using existing equipment and labor. Consolidation continues. Older farmers are discontinuing operations at a fast pace to secure equity for retirement. Few farmers and their bankers are interested in acquiring land due to really tight cash flow coverage ratios.”
What does it mean?
According to the survey, the value of quality farmland dropped 1.4% in the first quarter compared to a year earlier. Likewise, cash rents for farmland also nosed south. On the flipside, ranchland and pastureland values and cash rents increased noticeably for the second consecutive quarter.
Of the farm lenders surveyed, 41% said that about a quarter of their borrowers were getting off-farm income, 38% reported that between a quarter and one half had off-farm income, and 22% reported that more than half were earning off-farm income. This diversification is an essential component of financial health, because 22% of lenders said that up to half of their borrowers would have “severe difficulty” handling their farm-related debts without off-farm income.
What’s to blame?
Research from the Kansas City Fed notes that from 2013 to 2017, net farm income plummeted nearly 40%. To put that into numbers, it went from $123.8 billion to $75.5 billion. Net farm income is a key measure of farm profitability, underscoring the challenges experienced by the industry.
The Kansas City report points to increased plantings, favorable growing conditions, and record-breaking crop yields as contributors to the drop in commodity prices. It may seem counterintuitive that extremely successful yields could cause issues for the industry, but the short-term cash flow they provide to farmers is usually outweighed by the negative effect they have on prices. As with most things, when you have a lot of something but the demand remains fairly static, the less valuable it becomes.
“While domestic demand remains strong, the decline in its rate of growth has increased the importance of export markets as a source of long-term growth,” explains the report.
“Indeed, concerns have increased that farm income will fall even lower in 2018 amid trade disputes with China and other countries.”
The problem is that China and the United States are embroiled in an ongoing trade war. And a big part of the combat involves tariffs. For example, China leveled a 25% tariff on U.S. soybeans this summer, which resulted in soybean prices reaching a 10-year low. This is a big deal, because China is the largest buyer of American soybeans.
And the issues aren’t limited to China. There are currently trade disputes with other countries that purchase American produce, meaning the pressure is coming from multiple angles.
This summer, the USDA announced a $12 billion aid package for farmers and producers impacted by retaliatory tariffs from our international trade partners. Hopefully this move will provide relief and help stabilize some of the areas of the industry hurting the worst.
What does the future hold?
Despite factors like higher yields, rising production costs, and looming trade issues, the Eighth Federal Reserve District survey found that most lenders are fairly optimistic about the prospects for farm income. Part of this is due to the positive effects of off-farm revenue sources.
Other lenders nationwide point to the increases in ranchland and pastureland values and cash rents as indicators that the tide may be turning. And the fact that interest rates are still below the recent historical average is a great thing, meaning that interest still isn’t a significant component of farm profitability.